01/28/14 – Wave Count

01/28/14 . . . by Bob Karrow

WAVE COUNTS

If you aren’t familiar with my unorthodox wave counting method, there is a simple explanation (KISS) at the beginning of the glossary. The glossary also contains ideas and details that don’t appear in the blog.

The following 3 charts illustrate the necessity of following more than one index while seeking the correct wave count.

01-28-14 MAR ES 22 MINUTE – SP 500

01-28-14 MAR YM 22 MINUTE – DOW JONES IND

01-28-14 MAR NQ 22 MINUTE – NASDAQ COMP

The NASDAQ shows a clear wave count for the recent decline. The DJI shows a completed wave count also, but with less clarity. The SP500 has a muddled wave count.

The NASDAQ was the last to break to the downside as I had expected (tweet). It has a very clear wave count, but prior to the market break its upside wave count was muddled.

I’m showing a completed wave in the above charts, but that doesn’t mean the correction is over. Presently all we are seeing is a horizontal rally, which probably implies more to come on the downside. But sometimes nothing good happens until the 3rd step. With more to come, we could see 2 more steps down with a waterfall decline in one of the steps. But if the decline is finished, we obviously have unfinished business on the upside. For the moment we haven’t broken the decline channel on either of these charts.

Lets look at the longer term beginning with the uptrend that began late in 2012. These charts were tweeted the other day, but tweets are limited to comments and there was more to say about them.

This is the best case scenario wave count, which allows for another significant upward step (white 5). It also IS NOT DEFINITE that the present step up has been terminated.

01-28-14 SPX DAILY COUNT – GOOD

This is the worst case scenario wave count. This chart is intriguing because the peaks of white 1, 2 and 3 line up. This makes it possible that white 1 began from a lower low, which does happen occasionally. When this happens it causes interpretation problems for me. Repeating, the present channel is still intact.

01-28-14 SPX DAILY COUNT – BAD

Which of the above 2 charts is correct??? Based ONLY on the above charts of the SPX, the first chart is probably correct and that’s only because white step 1 began from a higher low.

But let’s look at the Dow Industrials for the same period.

01-28-14 DJI DAILY COUNT

Again this is why I watch different indexes, because they don’t necessarily tell the same story in the same way. The count on the Dow Industrial chart has a better picture that step 5 is finished or will be finished with one more push towards the all-time high. But . . .

The above chart carries the same warning as the previous SPX chart. I am fascinated with the red steps 1, 2, and 3, which are completely missing from the SPX chart. The red 1, 2, 3 are usually seen after a completed 3 steps. This interpretation would mean that we are in step 4 to be followed by another significant step upward (5). Remember the correction following step 4 must be much greater than what we have seen to date, otherwise you will have a continuation of the same step.

We need to keep watch for a channel break of the ENTIRE wave that began in 2012. A break of that channel should signify that a major correction is underway.

Beginning with the March 2009 bottom.

01-28-14 DJI DAILY FROM 2009

There is no apparent deviation on interpretation of white steps 1 and 2 with the different “price” indexes. But . . .

Here comes the weird and confusing stuff.

I have observed in some of my momentum indicators (shown in My Charts) that there is a possibility that white price steps 1 and 2 are really only 1 step. Now that’s weird and unusual, but I’m always open to the abstract idea. This idea is further made possible by my super secret indicators (SSI) one and two. They show a completed wave count that ended at white 2 on the above price chart. SSI is more of a trend indicator, but it’s wave counts are often correct if interpreted correctly. Sometimes they have their own set of rules for wave counts, which usually don’t affect the normal count until we are near a significant peak. Anyway this is further support to the idea that white 1 and 2 are only one step. Mind boggling and confusing, yes, but not something anyone needs to bother with at this time. It’s a future idea that might show relevance. It’s shows you that there can be more things going on behind the scenes than the obvious (prices).

Looking farther back in history, we have the following chart, which needs to be enlarged in your viewer to show detail. Set view to actual size.

01-28-14 INDEXES MONTHLY 33 YEARS

The first 2 indexes, SPX and DJI show that we are in the 5th step up since the 1974 bottom. 1974 was an important bottom and so far in the past that it often gets lost in the overall scheme of things. In the above chart I have labeled the major peaks as steps 3, 4 and 5. I also have labeled a downside red 1 and 2. The overall formation since 2000 is a megaphone. The red steps 1 and 2 carry an possibility that there will be a red 3 sometime in the future.

When will we see red 3??? It’s possible that we may never see it, but I wouldn’t rely on that outlook. It could take place many years from now or it could begin relatively soon.

As I have opined in the last year or so, there is a possibility that at the conclusion of the bull market since 2009, we could decline substantially (30+%), but far above where red 3 would be. That decline would be a correction for the entire bull market since March 2009. Following that could be 2 more steps upward, or a rally that falls short of the all-time highs. If the latter took place, this “could” become step 1 down in red step 3.

Red step 1 was a normal correction to the excesses of the bull market of the 1990s. The euphoria of 1998 and beyond 2000 was really something for the history books. I wonder if that will ever be recorded properly in the future. Doesn’t really matter to us, but history does repeat, only the details change (Edson Gould). Red step 2 was the result of an economic accident that nearly killed the banking system of the US. Red step 3 could be another accident or it could be a culmination of economic problems.